First Chinese property IPO this year offers cheap valuation

China SCE Property Holdings has taken on the challenge of becoming the first Chinese real estate developer to seek a listing in Hong Kong in 2010 -- a tough job given that the deal follows on the heels of nine other Chinese property IPOs in the final three-and-a-half months of last year.

At the end of 2009 investors were clearly showing some fatigue towards the sector and the very last property company that came to market in mid-December, Sunac China Holdings, had to cancel its IPO of up to $286 million the day before pricing. This was despite the fact that its shares were offered at a cheaper valuation than all the other 10 companies that had been in the market before it. (One other property IPO was cancelled in November.)

With that many companies in the market, it clearly helps to have a niche, or at least some business angle that makes the company stand out. SCE Property is stressing the fact that it is based in Fujian which is the province located on the east coast, just across from Taiwan. As such, this province has become the first port of call for many Taiwan people setting up businesses on the mainland and the region is expected to be a key beneficiary from the continued improvement in cross-strait relations between China and Taiwan.

But SCE Property is coming to market at a time when China watchers are expecting further measures from Beijing to prevent property prices from inflating too much. So, to play it safe, the mid-sized developer, which focuses primarily on high-end residential housing, is also offering a cheap valuation. Perhaps this is needed to really grab investor attention and it is interesting to note that Deutsche Bank, which brought the Sunac IPO in December together with UBS -- the one that eventually failed -- is also the global coordinator for this deal. It is sharing the bookrunner role with CCB International and Macquarie.

SCE Property is seeking to raise between HK$1.56 billion and HK$1.98 billion ($201 million to $255 million) by selling 600 million new shares at a price between HK$2.60 and HK$3.30 apiece. The base deal accounts for 21% of the enlarged share capital, but there is a 15% greenshoe that could increase that portion to 24.2% and the maximum proceeds to $294 million. As usual, 10% of the deal has been earmarked for Hong Kong retail investors.

The indicative price range values the company at 4.4 to 5.5 times projected earnings for 2010, or at a 53% to 63% discount versus its pre-money net asset value. This compares with similarly sized regional developers like Greentown China Holdings, KWG Property and Shui On Land, which trade at discounts to NAV of 30%-40% plus.

The company kicked off its institutional roadshow in Singapore yesterday and will spend another day there today before holding its main lunch presentation in Hong Kong on Friday. The management will then travel to Europe and the US. The Hong Kong public offering will start on Monday next week and the final price is due to be fixed on January 29. The trading debut is scheduled for February 5.